Insights & Advice

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“Play it again, Sam”

“Play it once, Sam, for old times’ sake, play ‘As Time Goes By’.”–Ingrid Bergman

“You played it for her, you can play it for me…If she can stand to listen to it, I can. Play it.”–Humphrey Bogart.

Casablanca

The Same Old Song?

Last year the bull market rally began to run out of steam on May 2nd. Over the next two months, the Dow fell 1,000 points to the 11,900 level. There was then a rally that took the averages back up to a little over 6% before giving up the ghost once more on July 26th . It continued to decline until the beginning of October, falling all together about 20%.

It wasn’t until the Federal Reserve Bank came to the rescue once again with a new round of monetary easing that the markets finally bottomed and began to rise on October 4th, 2011. Over the next six months, the S&P 500 Index rallied 30% until its peak this year on April 2nd. It waited until May 1st before beginning its present pullback.

For Wall Street traders it was also an exhausting time in the markets where swings of several percentage points a day became common. Much of the decline was blamed on Europe. The U.S. economic data didn’t help either. Week after week, one disappointing data point followed another raising the specter of a double dip recession. Does any of this sound familiar?

Today the circumstances in both Europe and the U.S. are eerily similar to what happened last spring. So far in May the stock market is playing the same swan song as last year.

“History doesn’t repeat itself, but it sure does rhyme,” said Mark Twain well over a century ago. And that saying certainly applies to the stock market. The question is what, if anything, is different about this time around?

The short answer is, not much. Italy and Greece were the focal points of the Euro debt crisis last year. Since then there has been a massive bank bailout and an austerity pact but nothing much has been done to turn the European Unions’ struggling economies around. The economic picture has actually deteriorated further, thanks to the nonsensical austerity plan engineered by Angel Merkel of Germany.

Spain is the main problem right now. As their economy nose dives, their debt explodes, while their banks wobble under mountains of bad real estate loans; the twelfth largest economy in the world is fast approaching a life support situation. Greece, after last week’s election upset, is also revisiting its off-again, on-again membership in the EU.

Once again, investors are keying off the Spanish/Greece/Italian sovereign debt yields to decide whether to buy or sell on a daily basis. So far it’s been mostly selling. Remember my “She said, He said” columns of last summer? Investors were driven crazy by conflicting and often contradictory statements out of Europe’s capitals. Today the names have changed– Hollande instead of Sarkozy in France, Draghi instead of Trichet at the ECB, and in Greece, Papandreou for someone yet to be announced– but the conflicting statements remain the same.

Over here we have the same issues over the economy that we had last year. And in the wings, hovers the Fed. That’s right, if our market, Europe’s markets, the economy and employment begin to drop dramatically, the Fed will once again come to the rescue. That, my dear reader, is why this year is rhyming with last year and the year before that.

As long as governments continue to tinker with the world’s stock markets, as they have done ever since the 2008 financial crisis, we will have these same issues over and over again. I have written about our stop and start economy often. As long as the Fed is the sole locomotive of growth, we can expect the economy and the stock markets to continue to boom and bust.

This has truly become the Great Recession. Readers of this column were advised at the end of March, beginning of April, to take profits and prepare for this sell-off. I am writing off this second quarter. By the end of it, I suspect the averages could be where they were at the beginning of the year, until then, stay defensive and I’ll keep you posted.

Posted in A Few Dollars More